Aviation Week & Space Technology Aug 23 , 2010 , p. 43
As India’s airlines recover, new aircraft are ordered and opportunities arise
Printed headline: Another Step Forward
Resilient domestic demand is supporting a resumption of aircraft ordering by Indian airlines, a bounce-back after three years of distress.
India’s airlines were among the most active in big fleet orders early in the decade, particularly in long-haul transports, and the market was a nursery for startups. But Indian carriers struggled with market overcapacity by the time the recession began gripping the industry in late 2008.
The combination of their own over-reach, poor management and the industry’s doldrums prompted mergers—of Jet Airways and Air Sahara, Kingfisher Airlines and Air Deccan, Air India and Indian Airlines—and experiments in survival as budget carriers increasingly took market share from mainline airlines. In one experiment, full-service Kingfisher has created its own low-fare subsidiary, Kingfisher Red.
As demand slackened, Jet Airways dry-leased three long-haul Boeing 777-300ERs to Thai Airways and THY Turkish Airlines while deferring delivery of three others. Kingfisher sold three Airbus A340s and deferred a combined 32 A320s and A380s while it faced legal action for non-payment on two leased A320s. Air India had to defer two 777 deliveries.
The harsh times hurt regional carriers, too. Paramount Airways had to return three Embraer 170s because it could not make lease payments.
Now the market appears to be turning around. Following a change in management, privately held budget carrier SpiceJet said in July it will order 30 Boeing 737‑800s to increase its fleet to 58 aircraft. Another independent, IndiGo Airlines, has applied to government authorities for operating approval for up to 150 aircraft of unspecified sizes. State-backed Air India plans to lease 10 Airbus A330s and several A320s and ATR turboprops, according to the Center for Asia Pacific Aviation. Jet Airways is expected to opt for more range in its Boeing 787 order, converting orders for 10 standard-sized -8 models into those for long-range -9s.
India’s fleet expansion actually began in June 2009, according to a Boeing analysis. Since then, Air India’s fleet has grown 1%; Jet Airways’, 17%; Kingfisher’s, 6%; IndiGo’s, 32%; and SpiceJet’s, 32%.
Budget carriers dominate the high end of this growth list. Little surprise, then, that their year-over-year market share increased to 66% in May 2010 from 49% a year earlier. That growth happened despite the introduction of hybrid service models by full-service carriers selling economy-class tickets as budget while retaining a few seats in business class.
Boeing India President Dinesh Keskar is not surprised. “It is the budget segment that is increasingly getting bigger [in Asia], especially in India,” he says. “Next year there will be even more [growth].”
The combined fleet of India’s six scheduled airlines totals 334 aircraft, mostly narrowbodies. They have combined orders for 281 aircraft.
But the growth is more cautious than during the earlier buildup, a sign, perhaps, of lessons learned. It also is playing against another reality of Indian aviation. To support growth, the country must overcome long-standing problems of inadequate airport infrastructure, both in terms of operations at its major hubs and, more importantly, as a shortage of facilities outside its big city centers. Without more regional airports, India’s vast traveling public will revert to its long-time transport preference, the national rail system, and air transport expansion will be constrained.
The country’s domestic passenger traffic is returning to long-term growth trends after contracting in the past two years, according to a report by India’s director general of civil aviation. Private airlines saw a jump in passenger revenues of 15-34% in the first quarter and the market grew 22% overall in the first half of 2010.
Following a consolidation phase, airlines are now focusing on greater operational efficiency, capacity management and deployment of smaller aircraft in low- and medium-density markets.
Given stable fuel prices, airline profitability can be sustained with the right balance of capacity and demand, says Keskar. In its 2010 20-year airline outlook, Boeing forecasts demand for 1,150 new commercial jets in India valued at $130 billion. They represent 3.6% of a worldwide demand for 30,900 aircraft.
As elsewhere, single-aisle transports will account for nearly 75% of this demand, with twin-aisle, medium-size jets taking almost all the remainder. Those numbers reflect a market growing to meet the basics of air travel, not the niches that more advanced markets may require.
Regional jets of 90 or fewer seats come in a distant third in Boeing’s ranking and very large jets barely register at all. These two categories hold smaller market shares in India than Boeing forecasts globally.
India’s domestic services are dominated by seven major airports, with the Mumbai-New Delhi city-pair accounting for 60% of the nation’s slots. As might be expected, competition on these routes is intense and yields are always under pressure. Meanwhile, regional airports too often have inadequate terminals, short runways and limited operating hours. Staffing issues add to those constraints; airline personnel are often unwilling to shift to smaller towns and cities.
Still, the best chance for profitable airline growth may lie in regional centers. Reliance Airport Developers CEO Vidya Basarkod thinks so. A leader among private airport investors, Reliance has undertaken seven small city airport projects. But Basarkod says a daunting 1,000 airstrips need to be upgraded.
If they follow that trend, independent airline developers will become a bigger force in Indian aviation. “It is time to look at second- and third-tier development and decongest metro airports,” says Basarkod. “India needs an overall policy on regional airports to enable them to play a significant role in aviation growth.”
Civil Aviation Secretary Madhavan Nambiar agrees. “For regional airports to be catalysts for growth, airport infrastructure will need to be enhanced,” he says. “We are looking at [developing] airports in deeper hinterlands, where the growth lies. As more people travel to remote areas, the demand for connectivity will explode.”
Embraer notes that India’s profile of concentrated hubs is not unusual in Asia. The Brazilian manufacturer says 70% of scheduled flights of up to 3,500 km. (2,200 mi.) last year departed from only 10% of the region’s airports.
This concentration of traffic at hub airports and a preference for large aircraft leaves many low- and mid-density markets with only limited direct air service. Embraer figures that about 250 such routes are unused because of inadequate demand to fill standard single-aisle transports. An additional 133 routes in non-metro areas have less than one frequency a day. “No wonder other forms of transport are used, such as first-class rail,” says Alex Glock, Embraer’s managing director for the Asia-Pacific region.
By Embraer’s count, only 20 of 261 aircraft currently scheduled for commercial flights are regional jets.
Boeing and Airbus say that imbalance is going to continue for aircraft seating fewer than 90 passengers. They emphasize a general trend toward larger single-aisle transports.
Still, Embraer, whose E-Jets tip into the 100-seat class, says its discussions with Indian regional carriers show an increasing interest in developing less dense routes with regional jets. “We see an imbalance in the Indian regional fleet compared with some matured economies,” says Embraer’s vice president for marketing, Luiz Sergio Chiessi.
Indian carriers flew 44 million domestic passengers last year. Of them, 17 million were concentrated on the 24 “Category One” high-density city pairs between India’s seven biggest metro areas. The remaining 27 million passengers flew in low- to medium-density markets.
However, the number of passengers in lower-density markets is a deceiving indication of market strength. Regional aircraft are simply not a threat to the larger narrowbodies built by Airbus and Boeing, says Keskar. A full 737 has lower unit costs than a regional jet, he says. Secondly, on the short sectors favored by regional jets, India’s powerful train network is a tough competitor.
Meanwhile, Boeing says fragmentation among India’s long-haul carriers is a result of their emphasis on point-to-point services. For instance, the India-U.K. market was dominated by two carriers 10 years ago. They provided 24 weekly services using very large aircraft that averaged 412 passengers per flight from three Indian hubs. Last May, six airlines competed in the sector, offering 104 weekly flights from eight destinations. They averaged 297 seats per flight, with medium-sized transports dominating.
Still, the importance of large hubs cannot be discounted. Indira Gandhi International Airport in New Delhi is driving growth with its new Terminal 3, opened last month, designed to support 34 million passengers annually.
Air India recently declared New Delhi, rather than the country’s financial center of Mumbai, its central hub. By April 2011, it expects to receive the first of 27 Boeing 787s it has on order. Air India will use the new twinjet to serve Melbourne, Australia, which its 777s and the A330s it plans to lease, cannot reach.
“We are at present focusing on the delivery of the 787, which will be a game-changer for Air India,” says Keskar. Besides improving operating margins, he says the introduction of the new airplane will help attract Star Alliance members seeking frequent-flier benefits. Air India is slated to join the alliance in mid-2011.
But the carrier also is debt-ridden. State-controlled Air India has presented turnaround plans three times to the government so far this year.
It is apparently considering leasing 10 A330-300s to tide itself over while awaiting the 787s. If that is the case, it raises the question of how well Air India has learned strategy, says one analyst. “What will they do once the 787s start to be delivered?” he asks. “Is their route planning done overnight? Will they get the A330s at one go?”